Level 3 looking more restrictive than anticipated, Westpac's chief economist says

Friday, 17 April 2020

New Zealand's Covid-19 alert level 3 is looking 'more restrictive' than what economic forecasts had allowed for, Westpac's chief economist Dominick Stephens says.

'Previously we were forecasting a 15 per cent decline for the June quarter for GDP (gross domestic product),' Stephens said in a video, published shortly after Prime Minister Jacinda Ardern announced further details about what life would look like at level 3.

'I think we'll review that over the coming week but it's looking like the initial decline for GDP could be larger than that,' he said.

The Treasury, the Government's economic think tank, on Tuesday published economic scenarios that looked 'broadly similar' to Wespac's, if 'a little more pessimistic', Stephens said.

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The Treasury's worst economic scenario would see GDP hit so hard that the economy would shrink to just over two thirds of its current size, crashing to just $219 billion in 2021.

Within the Treasury's numbers however were hints the Government is considering 'massively more fiscal stimulus to support the economy', Stephens said.

'They've already spent $20b on support measures but I think Treasury's work hinted at an additional $20b being spent.'

Despite concerns around the country's debt levels, Stephens said previous forecasts for New Zealand's debt-to-GPD ratio showed it would lift to 40 per cent. Even with an extra $20b of fiscal spending, it was likely to lift to only 45 per cent, he said – 'not really a materially different number'.

'Far more important actually is the trajectory the Government is on after we come out of Covid-19 whether the Government is showing a clear path to getting that debt back under control again.'

On Friday, the Treasury's weekly economic update said 'substantial contraction' in the June quarter is likely.

Visitor arrivals saw a record fall in February and dropped to zero following the country's border closure. The housing market is also beginning to show signs of decline, and some large companies have announced redundancies and plans for pay cuts.

Between March 20 and April 8, the number of jobseeker support recipients increased by over 22,000, despite a large number of businesses receiving the wage subsidy (with 1.42 million individuals covered as at April 9).

However, merchandise exports have held up, rising 13 per cent compared with the same week in March last year.

Meanwhile, the International Monetary Fund has forecast a much worse financial contraction in the global economy in 2020 than during the global financial crisis.

In its latest World Economic Outlook, which noted the pandemic is having a severe impact on economic activity around the world, as well as inflicting 'high and rising' human costs, it said New Zealand's economy would shrink by 7.2 per cent this year as the effect of the Covid-19 outbreak, and subsequent lockdown, hits.